No double taxation on interest from security deposit, once taxed as 'other income'

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Case Name:

Principal Commissioner of Income Tax Vs Karia Can Company Ltd (High Court of Bombay)

Income Tax Appeal No.1326 and 1316 of 2015

Key Takeaways:

1. Interest on fixed deposits from interest-free security deposits, if taxed as income from other sources, cannot be taxed again as part of rent.

2. Municipal Rateable Value can be a safe guide to determine fair rent when parties are at arm's length.

3. The Assessing Officer must carry out necessary exercises to determine Municipal Rateable Value before concluding excess rent.

Issue:

Can interest earned on a fixed deposit created from an interest-free security deposit be taxed both as income from other sources and as part of rent?

Facts:

The case doesn't provide many specific facts, but it appears that:

1. Karia Can Company Ltd. received an interest-free security deposit.

2. This deposit was used to create a fixed deposit that earned interest.

3. The tax authorities attempted to tax this interest both as income from other sources and as part of the rent.

Arguments:

The judgment doesn't explicitly state the arguments from both sides. However, we can infer that:

Revenue's argument:

- The interest earned on the fixed deposit should be considered part of the rent and taxed accordingly, in addition to being taxed as income from other sources.

Assessee's argument:

- Once the interest is taxed as income from other sources, it shouldn't be taxed again as part of the rent.

Key Legal Precedents:

1. Tip Top Typography case: This case dealt with Section 23(1)(a) of the Income Tax Act. It held that without determining the fair rent based on Municipal Rateable Value, the Revenue can't conclude that amounts received exceed reasonable rent

2. Section 23(1)(b) of the Income Tax Act is mentioned, which likely relates to the determination of annual value of property.

Judgement:

The High Court ruled in favor of the assessee, Karia Can Company Ltd. Key points of the judgment include:

1. The court found no fault with the Tribunal's order allowing the assessee's appeal.

2. It held that once interest on a fixed deposit from an interest-free security deposit is taxed as income from other sources, it can't be taxed again as part of the rent.

3. The court emphasized that the Assessing Officer hadn't carried out the necessary exercise to determine the Municipal Rateable Value of the property.

4. The court noted that when parties are at arm's length, the Municipal Rateable Value can be a safe guide to determine fair rent.

FAQs:

Q1: What was the main issue in this case?

A1: The main issue was whether interest earned on a fixed deposit created from an interest-free security deposit could be taxed both as income from other sources and as part of rent.

Q2: What did the court decide?

A2: The court decided that once such interest is taxed as income from other sources, it cannot be taxed again as part of the rent.

Q3: What's the significance of the Municipal Rateable Value in this case?

A3: The court emphasized that the Municipal Rateable Value can be a safe guide to determine fair rent when parties are at arm's length. The Assessing Officer should determine this value before concluding excess rent.

Q4: What precedent did the court rely on? A4: The court relied on the Tip Top Typography case, which dealt with Section 23(1)(a) of the Income Tax Act and the importance of determining fair rent based on Municipal Rateable Value.

Q5: Does this judgment apply to all cases of interest on security deposits?

A5: While the judgment sets a precedent, it's important to note that tax laws can be complex and each case may have unique circumstances. Always consult with a tax professional for specific situations.

These three Appeals under Section 260­A of the Income Tax Act, 1961 

(the Act), challenge the common order dated 30th  January, 2015 passed 

by the Income Tax Appellate Tribunal (the Tribunal). The common impugned order dated 30th January, 2015 is in respect of Assessment Years 2004-05, 

2005-­06, 2006­-07 and 2007-­08. These three Appeals relates to Assessment 

Years 2004-­05, 2006-­07 and 2007­-08.  

2. In all these Appeals, Revenue urges the following questions of law, for 

our consideration:

“(a) Whether on the facts and in the circumstance of the case and in law, 

the Tribunal was justified in law in holding that since interest on 

security deposits kept with banks is offered to tax as income under other 

heads, adding notional interest on security deposit in ALV will amount to 

double taxation without appreciating that interest on security was  considered by AO only to work out fair market rent which property would have fetched. The Tribunal failed to appreciate that interest free security deposit distorted the fair market rent which the Impugned property would 

have fetched if given to tenant having arm's length relationship?

(b) Whether on the facts and in circumstances of the case and in law, the 

Tribunal was justified in holding that society maintenance charges  are to 

be excluded from ALV u/s. 23(1

(b) without appreciating the fact that the actual rent received/receivable is independent of such charges and that the only deduction allowable under 

the Act is per section 24?”

3 Re. Question (a):­

(i) As it is evident from the question, the issue relates to adding of national interest on the interest free security deposit received by the Respondent­ Assessee from its licensee to the rent received. This to  determine the Annual Letting Value (ALV) of the property in terms of Section23(1)(b) of the Act.

(ii) It is an un­disputed position before the authorities that the property being let out on leave and license, is not covered by the provisions of Maharashtra Rent Control Act, 1991. Thus, no occasion to invoke the concept 

of standard rent to determine the sum for which the property  may be 

reasonably be expected to be let.

(iii) It is the case of the Revenue that amounts received as a rent/license fee in respect of similar/ identical properties, should be taken as the ALV 

in terms of Section 23(1)(b) of the Act.  It is on aforesaid basis that the 

Assessing Officer included the interest which was earned on the interest free security deposit received from the license. The interest obtained by 

the Respondent on the security deposit kept in the bank, is added to  the 

license fee in determining the rent received by the Respondent ­Assesse.

(iv) The impugned order of the Tribunal allowed the Assesse's appeal on the 

above issue by holding that, this issue is being covered by the decision of 

this Court in  CIT v/s. Tip Top Typography 368 ITR 330. In the aforesaid decision, this Court has held that for application of Section 23(1 (b) of 

the Act, the Assessing Officer has to first determine  the fair rent which 

would be received in respect of the said property.  

In the absence of standard rent, the fair rent of the property should be   determined by adopting Municipal Rateable Value. 

However, where the Assessing Officer finds that fixing of the rent by parties is doubtful then he would be entitled to dis-regard the  same after

hearing the parties in respect thereof. Only in such cases, the Municipal 

Rateable Value can be ignored.

(v) In the present facts, it is not the case of the Revenue that fixing of the rent was inflated/ deflated on extraneous consideration. Parties to the  Agreement are at Arms Length. Therefore, the Municipal Rateable Value can  be taken as a safe guide to determine the fair rent of the property.

(vi) In the present facts, the Assessing Officer has not carried out necessary exercise to determine the Municipal Rateable Value of the said property. Thus, he could not have come to the conclusion that the  amount received/ receivable by the Assessee under Section 23(1)(b) of the 

Act is in excess of fair rent.  

(vii) In the Tip Top Typography (supra), our Court, while dealing with Section 23(1) (a) of the Act, held that in the absence of Assessing Officer 

in carrying out the exercise to determine the fair rent in terms of the  Municipal Rateable Value, the Revenue would not be justified in concluding that the amounts received are in excess of the rent which the property may  be reasonably fetch on application of the fair rent by invoking the 

Municipal Rateable Value.  It was in the aforesaid circumstances that, the impugned order of the Tribunal, allowed the Respondent­ Assessee's appeal by following the decision of  this Court in Tip Top Typography (supra). Thus, no fault can be found with the impugned order of the Tribunal, holding that once interest on fixed deposit of interest free security deposit is subjected to tax as income from other sources, no occasion to tax it again as a part  of the rent can arise.

(viii) In the above view, we find that as the issue stands concluded in favour of the Respondent­ Assessee by the decision of this Court in Tip Top 

Typography  (supra), the question as framed do not give rise to any substantial questions of law. Thus, not entertained.

4. Re. Question (b):­

Appeal admitted on the substantial question of law at (b).

5. Registry is directed to communicate copy of this order to the Tribunal. 

This would enable the Tribunal to keep papers and proceedings relating to 

the present appeal available, to be produced when sought for by the Court.

(SANDEEP K. SHINDE,J.) (M.S.SANKLECHA,J.)